Washington and its allies know they won't beat the militants until they can stop the terrorist group from raking in cash. The problem is that they don’t know how to do it.
- By Jamila TrindleJamila Trindle is a senior reporter who covers finance, economics and business where they intersect with national security and foreign policy. Her beat spans everything from the economic underpinnings of conflict to sanctions, corruption and terror finance. Before coming to Foreign Policy magazine, Jamila reported for the Wall Street Journal’s Washington bureau, covering financial regulation and economics. She has also worked as a foreign correspondent in China, Indonesia and Turkey as a freelancer for NPR, Marketplace, The Guardian and others. She moved back to the U.S. to cover the post-crisis economy for PBS in 2009.
In October, the United States teamed up with Turkey on an initiative to cut off the Islamic State’s funding. U.S. officials openly acknowledged that Washington’s existing financial weapons for fighting terrorism weren’t up to the job of bankrupting the innovative and wealthy militants rampaging across Iraq and Syria.
The unprecedented effort to figure out how the Islamic State money machine works and how it can be stopped is led by an international standard-setter called the Financial Action Task Force (FATF). Now, only two months into the investigation, set to wrap up by February, expectations are already dimming.
The head of the task force is the first to admit that his organization may not turn over many new leads. FATF President Roger Wilkins said that though his team is still gathering intelligence, it may not be able to put a dollar figure on the Islamic State’s funding streams.
“They were fairly clear to me that I should temper my expectations in terms of being able to put a specific number on the amount of funds going in,” Wilkins, a former Australian government official and Citigroup executive who took over the one-year post in July, said in a recent interview. “Don’t overpromise or raise expectations about what we’ll be able to say with any definition.”
FATF officials are quick to point out that they are not running a criminal investigation; the group sets policy standards, so this investigation is about figuring out whether there are any chinks in the armor of the international financial system. The task force includes legal, foreign affairs, and financial intelligence officials from the United States and Turkey, who are co-leading the effort, as well as other member countries.
U.S. officials say airstrikes have diminished the $1 million to $2 million a day that the Islamic State had been earning on oil sales. Amos Hochstein, the State Department’s top diplomat on energy issues, said the coalition’s military and diplomatic efforts have disrupted a significant portion of the militants’ oil-smuggling operation.
“We’ve also seen a more significant portion of the oil they’re procuring remaining in areas they control to provide electricity, heating, and fuel,” Hochstein said in an interview.
But cutting off the group’s proceeds from other illegal activities like kidnapping and extortion is harder to do without first reconquering the territory where the militants operate what are effectively mafia-style criminal enterprises. U.S. officials say that the group has hundreds of millions of dollars in funds and tens of millions of dollars’ worth of U.S.-provided armaments left behind when Iraqi soldiers fled the group’s advances this year. Still, six months after the Islamic State stormed Mosul, key details about the inner workings of the group’s finances remain unknown, and precise estimates of its resources vary widely.
Like the U.S. counterterrorism finance apparatus, the FATF principally works within the formal financial system. The task force, based in Paris, is funded by its 36 members and meets three times a year. The FATF was established in 1989 to combat money laundering — criminals’ use of legitimate companies and banks to make illegal profits appear legitimate. After the 9/11 attacks, the group was also tasked with setting standards to thwart terrorists using the international banking system to collect money for new attacks.
The United States has made much progress in setting up a system that makes it harder for wealthy donors to send money through the developed world’s banking system to terrorist organizations, as was long the case with the wealthy Gulf nationals who funded al Qaeda. The U.S. government blacklists alleged terrorism financiers, banks add them to a list of bad actors, and the FATF tries to prod countries into actually enforcing the rules so that banks don’t send wire transfers for terrorists, strongmen, and drug lords. Through routine evaluations, the FATF scolds countries around the world into updating laws and better overseeing their domestic financial systems.
But the problem is that sometimes the cajoling doesn’t work. If countries fail to improve, the FATF doesn’t have much recourse other than harsh words. With no ability to force countries to get up to speed, the FATF often relies on positive reinforcement. The only two countries singled out for the FATF’s bad list are Iran and North Korea. Syria, for instance, is on the gray list of countries that are works in progress. According to a June 2014 review, the FATF found that the Syrian government had “substantially addressed its action plan at a technical level,” even though Syria’s security situation kept any auditors from verifying on-site that the rules were being implemented. Wilkins said Syria isn’t playing any role in the Islamic State investigation.
And the FATF has never taken on an investigation like this one. Wilkins said his team is looking at oil smuggling, antiquities trading, ransom, donations, and even crowdfunding. And the team is not just looking at money moving through banks, but also informal networks like hawalas, cash smuggling, gold, trade financing, and commodities sales. He said his group needs more cooperation from experts in other sectors — like shipping and customs — that are outside the expertise of his group.
Critics argue that the success of the Islamic State, also called ISIL, shows the answer to that question is a clear yes.
“The counterterrorism laws that are really similar all around the world were supposed to stop this from happening, to keep ISIL from being funded and gaining so much power, but it hasn’t worked,” said Christine Duhaime, a Canadian lawyer who advises banks on complying with anti-money-laundering and counterterrorism finance laws.
“We’re all following their rules, so to me, it seems like they’re the wrong body to go back and do this investigation,” Duhaime said.
Although the FATF has arguably made progress on the financial systems of its more than 30 members, the Islamic State operates in a largely lawless zone outside that influence. Iraq and Syria have been evaluated by the FATF, but both countries remain on the group’s gray list with Afghanistan and Sudan.
Even before the rise of the Islamic State, a 2012 FATF review of Iraq’s financial system found “very serious risks of money laundering and terrorist financing.”
The report concluded that corruption was a serious problem and that the Iraqi government needed to do more to investigate the flows of terrorist funding and criminal profits, especially “where crime proceeds traverse borders.”
The Iraqi government’s long history of oversight shortcomings has now made it easy for the militants to operate in the void.
“It’s understandably challenging to get to ground truth on this problem,” said Stuart Bowen, who spent nine years overseeing the money the United States spent in Iraq as the special inspector general for Iraq reconstruction.
Bowen, who left that post in October 2013, met with new Iraqi Prime Minister Haider al-Abadi and other Iraqi officials this month. Bowen said Abadi understands that he has to fight financial crime as well as the Islamic State.
“Corruption breeds terrorism, and they’ve lost, over the last 10 years, $150 billion in public funds to money laundering,” Bowen said. Most of Iraq’s private banks are under investigation for corruption, Bowen said.
For Iraq, solving the corruption problem and cutting support for the Islamic State are part of the same problem, says Jodi Vittori, a policy advisor with advocacy group Global Witness and a recently retired U.S. Air Force officer who wrote a book on terrorist financing.
“You have a whole criminalized government and criminalized economy,” Vittori said. “Can you have a government that is clean enough and legitimate enough that people will rally to them?”
Like other conflict-torn countries, Iraq will likely find it hard to improve the integrity of its financial system while fighting a war that threatens the very existence of the state. But experts say that until it does, outside investigators will make only slow progress.
“The U.N. can do reports, FATF can do reports, but it’s up to the country that has the jurisdiction to actually go after the money and get it back,” said Tom Creal, a former financial crimes investigator with the Federal Deposit Insurance Corporation who helped the United Nations trace the assets of Liberian warlord Charles Taylor.
Nikos Passas, a professor of criminology at Northeastern University, said the Islamic State’s funding may be a problem that’s not solvable. Foreign governments, he said, “have overestimated their understanding of how these networks operate.”
Last week, in a Dec. 18 briefing to the U.N. Security Council’s Counter-Terrorism Committee, FATF head Wilkins said that despite the FATF’s 25 years of work, many countries still can’t or won’t freeze terrorists’ assets.
Only 27 out of 192 countries reviewed were compliant or largely compliant. Even among the FATF’s 36 members, the majority are noncompliant or partially compliant.
Acknowledging that the numbers were a concern, Wilkins said the FATF is working on toughening its country evaluations, but said it has little recourse if countries don’t step up.
“We at FATF have no real sanctions as such for noncompliance,” Wilkins said. “The key incentive is peer pressure.”
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